Interpretive Opinion No. 71 / 53F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. David F. Kassoy
Attorney at Law
Weisman & Dreisen
9229 Sunset Boulevard
Los Angeles, CA 90069

Dear Mr. Kassoy:

The request for an interpretive opinion contained in your letter dated August 16, 1971, as supplemented by your letter dated September 17, 1971, has been considered by the Commissioner. Your letters raise the question whether the agreements between Century Metalcraft Corporation ("Century") and persons referred to therein and hereinbelow as "Distributors" are franchises or area franchises within the meaning of Sections 31005 and 31008, and as such subject to the provisions of the Franchise Investment Law. Based upon the assumptions stated below, this question is answered in the negative.

You have represented that Century proposes to engage in the marketing of a line of home security devices under the trade name and style of "Guardian Service" (GS). GS products will be demonstrated and sold to the consumer in his own home by Distributors or by so-called Security Counselors, who, we understand, buy the products from a Distributor at a wholesale price for sale to the public at a retail price and who are not required to pay any fee to Century or to the Distributors, other than the price of the GS product. We understand that Century is not enforcing its suggested retail price, and that consequently, the Distributor sells to the public at whatever price he desires and to Security Counselors at a lower price. The Distributor agrees to remain a bona fide of the area in which by the agreement, he is granted the to sell GS products to Security Counselors. He is identify himself as "Distributor of Guardian Devices".

You have further represented that Century will pay to a Distributor a 4% override on the sales of a new Distributor whom he has recommended. The recommending Distributor may qualify for an additional 2% override by performing training functions and otherwise assisting the new Distributor. To be eligible for the override, the recommending Distributor must continue to actively engage in the sale of GS products.

The registration requirement of Section 31100 and the other provisions of the Franchise Investment Law are applicable, in the absence of an exemption, to the offer or sale in this state of any franchise or, according to Section 31010, an area franchise.

Section 31005 defines "franchise" to include an agreement, either oral or written, between two or more persons by which a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's commercial symbol, such as its trade name or trademark, and the franchisee is required to pay a franchise fee. Section 31011 defines "franchise fee" to mean any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any such payment for goods and services. The purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a "franchise fee" pursuant to Section 31011(a), and Rule 011 of the Commissioner exempts from the registration requirement of Section 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis does not exceed $100.

We understand you to represent that Distributors may but are not required to purchase from Century sales brochures, operating instruction booklets, order forms, catalogue sheets, suggested sales approaches, suggested advertising layouts, business forms, and letterheads, and possibly other similar material, as well as custom built sample kits designed for the effective display and demonstration of GS products, and articles which they may offer to Security Counselors as an incentive for their sals efforts. We assume, and expressly predicate this opinion on the assumption that Distributors may effectively engage in the business of offering and selling GS products without purchasing any of these items.

Based upon this assumption and further assuming that GS products are sold to the Distributors at the bona fide wholesale price, we conclude that the Distributors under the agreements, are not required to pay a franchise fee. Inasmuch as under Section 31005 payment of a franchise fee is an essential element. in the definition of "franchise", we are of the opinion that the agreements between Century and the Distributors are not franchises within. the meaning of that Section.

Turning next to the question also raised by your letters whether the agreements in question are "area franchises" within the meaning of Section 31008 of the Law, "area franchise", according to Section 31008, includes an agreement between a franchisor and a subfranchisor, whereby the subfranchisor is granted the right for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf. of the franchisor. The question to be considered therefor is whether Century by the agreements with the Distributors grants them for a consideration the right, in the name or on behalf of Century to sell or negotiate the sale of franchises to other Distributors or to Security Counselors.

It might be concluded that the question whether the agreements are area franchises, like the question whether they are franchises, is answered by our comments concerning the lack of a franchise fee. This conclusion would be based on an interpretation of Section 31008 attributing to the words "for a consideration" the same meaning as Section 31011 gives to the words "franchise fee" in Section 31005.

However, we need not decide that point, because on the assumption that the price paid for GS products does not exceed the bona fide wholesale price, our conclusion that the agreements are not area franchises can be based on the ground that the Distributors are not selling franchises to either the other Distributors or to Security Counselors.

In our opinion, notwithstanding the overrides which Distributors receive for introducing new Distributors to Century, since the agreement between Century and the new Distributors for lack of a franchise fee is not a franchise, it cannot be said that Century grants to Distributors the right to sell or negotiate -the sale of franchises to other Distributors.

As regards the appointment of Security Counselors, you have represented that they are not required to pay any fee to Century or to the Distributors other than the price of the GS product. The fact that this price is higher than the price which the Distributor pays to Century, does not necessarily mean that the price paid by the Security Counselors is in excess of the bona fide wholesale price of the product. A variance in the price paid for a product by persons engaged in its distribution on different levels, such as jobbers selling to wholesalers, and wholesalers selling to retailers, does not necessarily lead to the conclusion that the higher price paid by the distributor on the lower level constitutes a franchise fee. In a layered system of distribution, the price paid by a person engaged in the distribution of the goods on one level may be a bona fide wholesale price, though it is at variance with the bona fide wholesale price paid for the same goods by a distributor on another level.

Assuming that the price paid for GS products by the Security Counselors does not exceed the bona fide wholesale price of these goods, and expressly predicating our opinion upon that assumption, since you have represented that aside from this price no fee is paid by the Security Counselors to Century or to the Distributors, we conclude that. the Security Counselors are not being granted a franchise by Century and that Distributors are not selling or negotiating the sale of franchises to the Security Counselors.

Dated: San Francisco California
October 26, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy